How Canada’s ‘haves’ get had

How Canada’s ‘haves’ get had

Kevin Libin, National PostFriday, Feb. 18, 2011

Nearly a decade ago, the Nobel Prize-winning economist who pioneered the federal fiscal redistribution model called equalization came to Montreal to announce that, in reflecting on his work 50 years after the fact, he may have missed something.

The idea that governments could give a leg-up to regions that lagged economically by transferring dollars from stronger regions still had merit, James Buchanan told a luncheon co-sponsored by the Atlantic Institute for Market Studies, the Montreal Economic Institute and the Frontier Centre for Public Policy. There were, he said, still valid economic arguments for lending stragglers a hand by giving them some capacity to catch up to their hardier neighbours. Except, back in the 1950s, there was, in his field, a “presumption that the economist is engaged in proffering advice to a benevolent and omniscient government.”

He and his colleagues had yet to awaken to the reality that grubby politics could corrupt what was, on paper at least, a rather good idea. “The incentive structures within the operation of politics,” Prof. Buchanan said, “were not … sufficiently emphasized in the early treatments.”

That is to say he didn’t anticipate what a wreck Canadians were capable of making out of his model — one the federal government still sticks to doggedly, despite the overwhelming evidence of the debasement of its original purpose. The extent of its bastardization couldn’t have been made clearer than in a study released this week by the Ontario Chamber of Commerce.

Politely titled Dollars and Sense: A Case for Modernizing Canada’s Transfer Agreements, it lays out the astonishing evidence for just how badly equalization has gone off the rails.

As the Chamber’s CEO, Len Crispino put it, it shows that while Ontario in the past half-century has been, among provinces, easily the strongest force driving the Canadian economy, its citizens “are the most disadvantaged Canadians when it comes to public services like education, health care and child care.”

In short, the grave truth about equalization in Canada is this: the more productive and responsible your province, the lousier your access to medicine, nursing homes, schools, the justice system, daycares and dozens of other services will be. On the other hand, the more a province proves itself fiscally careless and economically stagnant, the likelier its citizens are to enjoy the most well padded public programs on offer.

Once you memorize that formula, the study’s statistical findings are depressingly easy to predict. Want to know which provinces have the fewest registered nurses per capita? Look to the provinces that have been over the last couple of decades the most economically and fiscally competitive. Alberta, Ontario and British Columbia have, on average, 24% fewer RNs for every 100,000 people than New Brunswick, Prince Edward Island, Nova Scotia and Manitoba.

Now, guess which three provinces have the fewest nursing home beds per capita? If you said Alberta, Ontario and B.C., you’d be right: P.E.I., New Brunswick, Newfoundland and Manitoba have the most beds per 100,000 population — on average, 42% higher than three of the provinces primarily responsible for fuelling the Canadian economic engine over the last 10 years.

“What is striking is virtually every statistical measure that exists suggests that Ontario has probably, in general, the least accessible public sector of all Canadian provinces,” says David MacKinnon, author of the chamber study. “Which is an amazing thing, given that the government of Canada has been saying for 50 years that Ontario citizens need to help out others who have less public services than they.”

Critics often scapegoat Quebec as the most obnoxious equalization sponge in the federation, probably because it soaks up by far the largest total dollar amount — $8.5-billion out of $14.3-billion in total 2010-11 equalization transfers — and because it spends so garishly on things like subsidizing daycare for the children of lawyers and doctors, and building arenas for imaginary professional hockey teams. But the province actually serves 24% of the Canadian population and its private business sector is robust enough to support 75% of its provincial spending, Mr. MacKinnon points out. The most expensive passengers, per capita, on the equalization gravy train are comparatively tiny Manitoba, P.E.I., New Brunswick and Nova Scotia.

P.E.I. is a province that relies on major federal transfer payments for 35% of its government revenue, compared with 13% in Ontario and just 7% in Alberta, but families on the Island are free to avail themselves of twice as many daycare spaces per child under five years old than either of those two provinces. And the Atlantic provinces benefit from 20 publicly funded universities and colleges, just three fewer than Ontario, which serves more than five times the population.

This flagrant inequity, and little else, it seems, is what Canada has to show for its 53-year long experiment with equalization. Certainly, it cannot be credibly said that the program has helped provide struggling provinces the fiscal tools they need to narrow the economic gap between them and more productive regions. With the sole exception of Newfoundland, saved recently from perennial dependence by an offshore oil jackpot, “the performance of recipients relative to contributors has changed little in 30 years,” the study notes. “After 50 years of massive subsidies, their performance in Canadian rankings of relative income performance has changed little.”

Instead, the biggest recipients have only responded rationally to the incentives the federal government has provided them. Manitoba uses its $1.2-billion equalization transfer to give away electric power at prices well below market rates, likely because charging realistic rates will improve its fiscal capacity and cause it to lose equalization handouts, explains Mark Milke, director of Alberta policy studies at the Fraser Institute. And besides, cheap power keeps voters happy.

For that matter, so does being able to offer up jobs paid for by other provinces, which surely explains why in most recipient provinces, the public sector comprises between 50% and 70% of the economy, and one in four workers is employed by the public sector.

Though Ottawa is scheduled to renew the equalization arrangement in 2014, there’s not much reason to hope that after more than five decades of this that Ottawa has any appetite to right this imbalance. Premiers of the biggest have-not provinces (not counting Ontario, which will pay roughly $6-billion into equalization this year while collecting $1-billion in aid) have grown conditioned to relying on the steady stream of subsidies. New Brunswick Premier David Alward demonstrated as much Tuesday when he visited Ottawa to deliver his priorities to the Prime Minister for the upcoming federal budget. The top of his list, he said, was “maintaining equalization and keeping funding stable for New Brunswick until 2014.” The Prime Minister, reported Mr. Alward, promised he would.

After all, it’s not just access to government services that counts for more in equalization-dependent provinces; their votes are bigger and better, too, thanks to the disproportionate allocation of parliamentary seats that gives voters in Manitoba, P.E. I, Nova Scotia and New Brunswick 1.7 times the electing power, on average, of voters in Ontario, Alberta and B.C. Buying electoral favour was plainly not something Prof. Buchanan could have anticipated when building his economic models — which is why equalization in Canada, having become so perverted by politics, can hardly be considered an economic model at all.